Any Reason To Buy This Pot Giant After Debt Deal?

Canadian pot producer Canopy Growth (CGC) at the end of June entered into agreements with debtholders — including major shareholder Constellation Brands (STZ) — to convert millions of its debt into stock. CGC tanked after the news. Is there any reason to buy it now?

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The company hopes the move will help it lean down some of its debt due next year. But it would dump more shares onto the market.

Canopy on June 29 agreed with investors to turn roughly $200 million of its convertible debt — or debt that be turned into stock at a certain point — into stock at a price of between $2.50 and $3.50. A subsidiary of Constellation will acquire between roughly 22 and 31 million Canopy shares. Canopy struck a similar, smaller agreement a day after.

The agreement arrives as Canopy, like some other cannabis producers in the nation, wrangles with debt and losses, after growing more weed than people wanted and moving too aggressively into markets abroad.

Canopy Growth Earnings

Canopy reported fiscal fourth-quarter earnings in May. It lost $1.14 per share, worse than the 23 cents expected. Sales of $87.6 million missed expectations and were down from the prior quarter and year. Cannabis revenue fell. The company had cash and short-term investments of $1.1 billion, compared to $1.8 billion a year ago.

Canopy, which earlier pushed back its profit targets, said it expected to reach positive adjusted EBITDA — the cannabis industry’s preferred profitability metric — in fiscal 2024, “with the exception of strategic investments in BioSteel and advancement of our U.S. THC strategy.”

Canadian pot producers hope full federal legalization in the U.S. will give them access to a bigger — but still very competitive — marijuana market. After overexpanding and then cutting back in Canada, Canopy has focused more on the U.S. side of its business, where it sells Martha Stewart’s line of CBD edibles.

Canopy has a majority ownership of sports-drink maker BioSteel, which is also backed by star athletes like the NBA’s Luka Doncic and the NFL’s Patrick Mahomes. It also has deals in place to buy several THC-product makers when federal law in the U.S. allows — Acreage Holdings, Wana Brands and Jetty Extracts.

However, Piper Sandler analyst Michael Lavery, who covers CGC stock, said BioSteel was “driving significant margin headwinds” for Canopy, as it tries to secure sponsorship deals with sports teams and athletes and tries to expand the beverages’ retail and distribution network.

However, BioSteel during the quarter faced higher costs related to that expansion and the broader supply-chain issues affecting many businesses. Those costs related in part to warehousing and fuel. Biosteel’s revenue was around $10.7 million during the quarter, down from the prior year.

CGC Stock Fundamental Analysis

CGC stock has a market cap of around $1.1 billion, according to MarketSmith.

The EPS Rating of Canopy Growth stock, a measure of profit growth on a scale of 1 to 99, is 50. Earnings growth is a hallmark of top stocks.

Wall Street expects Canopy Growth to lose money in its current fiscal year. The stock also has a not-great SMR Rating of E.

CGC stock has a Composite Rating of 4 out of a best-possible 99, according to MarketSmith. Investor’s Business Daily research shows the biggest stock winners typically have Composite Ratings in the 90s.

CGC Stock Technicals

IBD advises investors to buy stocks only after they set up in proper bases and rise above certain resistance levels, called buy points. But for Canopy, no such base pattern has formed, meaning no new buy point is in play.

Shares soared as high as 56.50 last year, amid 2021’s meme-stocks frenzy. But they have since wiped away those gains, and now trade at around $2.80. CGC stock is below its 50-day line. The stock is well below its 200-day line.

Canopy’s relative strength line, which compares its stock performance with that of the S&P 500, has moved lower. The stock’s Accumulation/Distribution grade of E indicates a decent amount of selling by institutional investors. Broader trends also point to a lengthy decline for the stock overall.

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Is Canopy Growth Stock A Buy?

Bottom line: Canopy Growth stock is not in a buy zone, so it isn’t a buy right now.

IBD’s research shows investors would be better off looking for stocks with stronger fundamentals and that are closer to their highs.

Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.

Follow Bill Peters on Twitter at @IBD_BPeters. 

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